Blockchain technology: property transactions

Chain reaction

The internet made it possible to transfer information,
quickly, cheaply and paperlessly without intermediaries. Similarly, blockchain
technology offers the same advantages for transferring value. You use the
internet to transfer words and pictures; you use blockchain platforms to
transfer money and assets.

When people use the term ‘the blockchain’, they are most
often referring to Bitcoin, although
sometimes to Ethereum and occasionally
other smaller cryptocurrencies.

In any case, blockchains can offer the following advantages
when making real-estate transactions:

disintermediation

fraud prevention

enabling ‘money 2.0’

smart contracts.

Disintermediation

Real-estate transactions can be cumbersome, opaque and
expensive because of intermediaries; in the USA, these include brokers,
government property databases, title companies such as insurance and property
databases, escrow (3rd-party) companies, inspectors and appraisers and notaries
public. The line-up will be similarly lengthy in most territories.

Paying multiple parties, waiting for and depending on them
causes much frustration with property transactions; Bitcoin, Ethereum and
others cut out these intermediaries. Currently, these are necessary because
they hold information that others cannot access, or they have skills or
licences that are needed in the existing market. Public blockchains in contrast
provide a distributed database in which anyone can record information without
needing permission to do so and without it being censored, and which anyone can
access.

To consider title: US county recorder offices and title
insurance companies maintain various databases of property ownership records,
including the address, previous and current owners, and various encumbrances
such as mortgages. Before the advent of the internet, the government and title
companies were necessary to verify and record property data. How can blockchain
replace them?

‘Blockchain will enable
every property, everywhere, to have a corresponding digital address that
contains occupancy, finance, legal, building performance and physical
attributes that conveys perpetually and maintains all historical transactions.

‘The data will be immediately available online and
correlatable across all properties. The speed to transact will be shortened
from days, weeks, or months to minutes or seconds.’

Currently, the title to a property is a piece of paper. To
transfer a property in the USA, you fill in the blanks on a deed, sign it with
a pen, drive to a notary who puts their rubber stamp on it and then deliver it
to the county recorder’s office to be placed in their database. Instead of a
paper title, Bitcoin or Ethereum can create a digital title; this is a
cryptographically secure token that can be transferred as effortlessly, quickly
and cheaply as an email.

Before email, you needed envelopes, stamps, trucks, sorting
facilities and postal workers to organise and distribute the mail if you wanted
to send a letter. Once people can easily verify property records themselves and
transfer a title digitally, brokers, escrow companies, title insurance
companies, county recorders and notaries public will go the way of the post
office.

Fraud prevention

Real-estate fraud is practised at every level of the market,
and is accomplished by forging paper documents such as driving licences, bank
statements or deeds. Where does Bitcoin come in?

‘By offering a 100% incorruptible resource, whereby
the sender and recipient of funds is logged, and where ‘digital ownership
certificates’ for properties are saved, the blockchain would effectively make
forged ownership documents and false listings a thing of the past.

‘The unique digital ownership certificates would be almost
impossible to replicate, and would be directly linked to one property in the
system, making selling or advertising properties you do not own almost
impossible.’

‘Money 2.0’

Bitcoin is a digital currency; Ethereum has its ‘Ether’
token. Unlike the dollar or euro, blockchain currencies are not paper that is
later represented by software but are entirely electronic from the outset. The
power of software is its programmability; the power of cryptocurrency is you
can program it to escrow and distribute itself. With fiat currency – that is,
conventional, non-cryptocurrency – you need humans and banks.

When someone rents an apartment, the landlord takes a
security deposit in case the tenant damages the property. By law, they are
supposed to keep those funds in a separate escrow account and not spend it.
Once the lease ends, the tenant has to rely on the good faith of the landlord
to have the deposit returned. But if you have ever attended a small claims
court, you will know how frequently this system fails.

Bitcoin has a function called multisignature, in which you
can use your private key to approve the transfer of digital currency to another
person. With this ‘multisig’ option, you can carry out a transaction with 3
private keys, where at least 2 are required for spending.

Bitcoin can be used to create a programmable escrow. Instead
of sending the landlord’s dollars to a bank account, the tenant and landlord
together create a multisignature transaction. Each have a private key, while a 3rd
is given to a neutral 3rd-party arbitrator. For the security deposit to be
spent, 2 of the 3 people need to use their private key. The funds are locked in
crypto-escrow for the duration of the lease.

The tenant will almost always want their deposit back, and
so they will approve the transaction with their private key. When the lease
ends, if the tenant did not damage the property, the landlord uses their own
private key to release that Bitcoin deposit. If they did damage the property,
then the landlord will send evidence to the arbitrator, though the tenant has
an opportunity to respond. After the arbitrator hears both sides, they will use
their private key to send the deposit to the successful party.

The Bitcoin can be sent instantly, 24 hours a day, 7 days a
week. There is no need to wait for a letter or an email, or any need to deal
with routing and account numbers and banking hours for a wire transfer. By
using Bitcoin, real-estate escrows can be carried out more securely, quickly
and cheaply.

Bitcoin is also censorship-resistant. China attempts to
maintain tight control of its currency, the Renminbi, and each citizen is
restricted to transferring the equivalent of $50,000 outside the country a
year. However, in 2016, Chinese families made up the largest group of overseas
homebuyers in the USA for the first time, showing the potential for a
technology that would enable such transactions to be made easily and safely.

Smart contracts

Blockchain protocols such as Bitcoin and Ethereum have the
ability to perform ‘smart contracts’, a concept that began with Nick Szabo, a
pioneer of blockchain and cryptocurrency. He gave the example of a vending
machine that releases an item after a selection is made and the correct value
is deposited.

The goal of a smart contract is to reduce the need for
humans to process and verify an agreement. A software protocol automates and
self-executes an action when certain conditions are met. The box, below, gives
an example of how a smart contract could be used in a property transaction.

Using a smart contract

Drew Hinkes, a lawyer at Berger Singerman and a digital
currency advocate, observed in 2014 that, at present, a real-estate transaction
works in the following way: ‘Party A and Party B … enter into a contract that
requires Party A to pay $200,000 to Party B in exchange for Party B agreeing to
convey title to Party B’s condominium unit to Party A on receipt of payment.

‘If Party A pays ... but Party B refuses to convey title,
Party A is required to hire an attorney to seek specific performance of that
contract, or to obtain damages. The determination of the outcome will be made
by a 3rd party: a judge, jury or arbitrator.’

But Hinkes explained that, in contrast, ‘using a smart
contract … avoids the potential for one party to perform while the other
refuses or fails to perform. Using a smart contract, Party A and Party B can
agree to the same transaction, but structure it differently. In this scenario,
Party A will agree to pay $200,000 worth of virtual currency to Party B, and
Party B will agree to transmit the title to the condominium in a specialised
type of coin on the blockchain.’

He continued: ‘When Party A transfers the virtual currency
to Party B, this action serves as the triggering event for Party B, which then
automatically sends the specialised coin, signifying the title to the
condominium at issue, to Party A. The transfer is then complete, and Party A’s
ownership of the condominium is verifiable through a publicly available record
on the blockchain.

‘Structuring this transaction as a smart contract ensures
that the transfer occurs as soon as funds are received, and results in a
publicly available, verifiable record of the transfer. Because the contract [is
performed] automatically based on the predetermined rules agreed to by the
parties to the contract, there is little risk of fraud, and virtually no need
for external measures to enforce performance of the agreement.

‘Thus, no specific performance action would ever be
necessary to compel the transfer after payment is made because the coin, which
represents title to the condominium, is automatically transferred, and the
transfer is automatically published to 3rd parties on the blockchain.’

Summary

Wall Street is already using Bitcoin technology to issue
stock and transfer private securities, the International Blockchain Real Estate
Association has more than 900 members, and ever-increasing numbers of property
professionals are looking to get connected. It is time for the real-estate
sector to wake up to the cost savings, efficiencies, fraud reductions and conveniences
of the technology.